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Title: The Great Slump of 1930
Author: Keynes, John Maynard (1883-1946)
Date of first publication: 1930
Place and date of edition used as base for this ebook:
London: The Nation & Athenĉum,
issues of December 20 and December 27, 1930
(First Edition)
Date first posted: 12 November 2008
Date last updated: 12 November 2008
Project Gutenberg Canada ebook #197
This ebook was produced by:
Dr Mark Bear Akrigg

THE GREAT SLUMP OF 1930

By

JOHN MAYNARD KEYNES

I.

The world has been slow to realize that we are living
this year in the shadow of one of the greatest economic
catastrophes of modern history. But now that the man in the
street has become aware of what is happening, he, not
knowing the why and wherefore, is as full to-day of what may
prove excessive fears as, previously, when the trouble was
first coming on, he was lacking in what would have been a
reasonable anxiety. He begins to doubt the future. Is he now
awakening from a pleasant dream to face the darkness of
facts? Or dropping off into a nightmare which will pass
away?

He need not be doubtful. The other was not a dream. This
is a nightmare, which will pass away with the morning. For
the resources of nature and men's devices are just as
fertile and productive as they were. The rate of our
progress towards solving the material problems of life is
not less rapid. We are as capable as before of affording for
everyone a high standard of life—high, I mean, compared
with, say, twenty years ago—and will soon learn to afford a
standard higher still. We were not previously deceived. But
to-day we have involved ourselves in a colossal muddle,
having blundered in the control of a delicate machine, the
working of which we do not understand. The result is that
our possibilities of wealth may run to waste for a
time—perhaps for a long time.

I doubt whether I can hope, in these articles, to bring what
is in my mind into fully effective touch with the mind of the
reader. I shall be saying too much for the layman, too little
for the expert. For—though no one will believe it—economics
is a technical and difficult subject. It is even becoming a
science. However, I will do my best—at the cost of leaving
out, because it is too complicated, much that is necessary
to a complete understanding of contemporary events.

First of all, the extreme violence of the slump is to be
noticed. In the three leading industrial countries of the
world—the United States, Great Britain, and
Germany—10,000,000 workers stand idle. There is scarcely
an important industry anywhere earning enough profit to make it
expand—which is the test of progress. At the same time, in
the countries of primary production the output of mining
and of agriculture is selling, in the case of almost every
important commodity, at a price which, for many or for the
majority of producers, does not cover its cost. In 1921, when
prices fell as heavily, the fall was from a boom level at which
producers were making abnormal profits; and there is no example
in modern history of so great and rapid a fall of prices from
a normal figure as has occurred in the past year. Hence the
magnitude of the catastrophe.

The time which elapses before production ceases and
unemployment reaches its maximum is, for several reasons,
much longer in the case of the primary products than in the
case of manufacture. In most cases the production units are
smaller and less well organized amongst themselves for
enforcing a process of orderly contraction; the length of
the production period, especially in agriculture, is longer;
the costs of a temporary shut-down are greater; men are more
often their own employers and so submit more readily to a
contraction of the income for which they are willing to
work; the social problems of throwing men out of employment
are greater in more primitive communities; and the financial
problems of a cessation of production of primary output are
more serious in countries where such primary output is
almost the whole sustenance of the people. Nevertheless we
are fast approaching the phase in which the output of
primary producers will be restricted almost as much as that
of manufacturers; and this will have a further adverse
reaction on manufacturers, since the primary producers will
have no purchasing power wherewith to buy manufactured
goods; and so on, in a vicious circle.

In this quandary individual producers base illusory hopes on
courses of action which would benefit an individual producer
or class of producers so long as they were alone in pursuing
them, but which benefit no one if everyone pursues them. For
example, to restrict the output of a particular primary commodity
raises its price, so long as the output of the industries which
use this commodity is unrestricted; but if output is restricted
all round, then the demand for the primary commodity falls
off by just as much as the supply, and no one is further forward.
Or again, if a particular producer or a particular country
cuts wages, then, so long as others do not follow suit,
that producer or that country is able to get more of what trade
is going. But if wages are cut all round, the purchasing power
of the community as a whole is reduced by the same amount as
the reduction of costs; and, again, no one is further forward.

Thus neither the restriction of output nor the reduction of
wages serves in itself to restore equilibrium.

Moreover, even if we were to succeed eventually in
re-establishing output at the lower level of money-wages
appropriate to (say) the pre-war level of prices, our
troubles would not be at an end. For since 1914 an immense
burden of bonded debt, both national and international, has
been contracted, which is fixed in terms of money. Thus
every fall of prices increases the burden of this debt,
because it increases the value of the money in which it is
fixed. For example, if we were to settle down to the pre-war
level of prices, the British National Debt would be nearly
40 per cent. greater than it was in 1924 and double what it
was in 1920; the Young Plan would weigh on Germany much more
heavily than the Dawes Plan, which it was agreed she could
not support; the indebtedness to the United States of her
associates in the Great War would represent 40-50 per cent.
more goods and services than at the date when the
settlements were made; the obligations of such debtor
countries as those of South America and Australia would
become insupportable without a reduction of their standard
of life for the benefit of their creditors; agriculturists
and householders throughout the world, who have borrowed on
mortgage, would find themselves the victims of their
creditors. In such a situation it must be doubtful whether
the necessary adjustments could be made in time to prevent a
series of bankruptcies, defaults, and repudiations which
would shake the capitalist order to its foundations. Here
would be a fertile soil for agitation, seditions, and
revolution. It is so already in many quarters of the world.
Yet, all the time, the resources of nature and men's devices
would be just as fertile and productive as they were. The
machine would merely have been jammed as the result of a
muddle. But because we have magneto trouble, we need not
assume that we shall soon be back in a rumbling waggon and
that motoring is over.

II.

We have magneto trouble. How, then, can we start up again?
Let us trace events backwards:—

1. Why are workers and plant unemployed? Because
industrialists do not expect to be able to sell without loss
what would be produced if they were employed.

2. Why cannot industrialists expect to sell without loss?
Because prices have fallen more than costs have
fallen—indeed, costs have fallen very little.

3. How can it be that prices have fallen more than costs?
For costs are what a business man pays out for the
production of his commodity, and prices determine what he
gets back when he sells it. It is easy to understand how for
an individual business or an individual commodity these can
be unequal. But surely for the community as a whole the
business men get back the same amount as they pay out, since
what the business men pay out in the course of production
constitutes the incomes of the public which they pay back to
the business men in exchange for the products of the latter?
For this is what we understand by the normal circle of
production, exchange, and consumption.

4. No! Unfortunately this is not so; and here is the root of
the trouble. It is not true that what the business men pay
out as costs of production necessarily comes back to them as
the sale-proceeds of what they produce. It is the
characteristic of a boom that their sale-proceeds exceed
their costs; and it is the characteristic of a slump that
their costs exceed their sale-proceeds. Moreover, it is a
delusion to suppose that they can necessarily restore
equilibrium by reducing their total costs, whether it be by
restricting their output or cutting rates of remuneration;
for the reduction of their outgoings may, by reducing the
purchasing power of the earners who are also their
customers, diminish their sale-proceeds by a nearly equal
amount.

5. How, then, can it be that the total costs of production
for the world's business as a whole can be unequal to the
total sale-proceeds? Upon what does the inequality depend? I
think that I know the answer. But it is too complicated and
unfamiliar for me to expound it here satisfactorily.
(Elsewhere I have tried to expound it accurately.) So I must
be somewhat perfunctory.

Let us take, first of all, the consumption-goods which come
on to the market for sale. Upon what do the profits (or losses)
of the producers of such goods depend? The total costs of
production, which are the same thing as the community's total
earnings looked at from another point of view, are divided
in a certain proportion between the cost of consumption-goods
and the cost of capital-goods. The incomes of the public, which
are again the same thing as the community's total earnings,
are also divided in a certain proportion between expenditure
on the purchase of consumption-goods and savings. Now if the
first proportion is larger than the second, producers of
consumption-goods will lose money; for their sale proceeds,
which are equal to the expenditure of the public on
consumption-goods, will be less (as a little thought will
show) than what these goods have cost them to produce. If,
on the other hand, the second proportion is larger than the
first, then the producers of consumption-goods will make
exceptional gains. It follows that the profits of the
producers of consumption goods can only be restored, either
by the public spending a larger proportion of their incomes
on such goods (which means saving less), or by a larger
proportion of production taking the form of capital-goods
(since this means a smaller proportionate output of
consumption-goods).

But capital-goods will not be produced on a larger scale unless
the producers of such goods are making a profit. So we come
to our second question—upon what do the profits of the
producers of capital-goods depend? They depend on whether the
public prefer to keep their savings liquid in the shape of
money or its equivalent or to use them to buy capital-goods
or the equivalent. If the public are reluctant to buy the
latter, then the producers of capital-goods will make a loss;
consequently less capital-goods will be produced; with the
result that, for the reasons given above, producers of
consumption-goods will also make a loss. In other words, all
classes of producers will tend to make a loss; and general
unemployment will ensue. By this time a vicious circle will
be set up, and, as the result of a series of actions and
reactions, matters will get worse and worse until something
happens to turn the tide.

This is an unduly simplified picture of a complicated
phenomenon. But I believe that it contains the essential
truth. Many variations and fugal embroideries and
orchestrations can be superimposed; but this is the tune.

If, then, I am right, the fundamental cause of the trouble
is the lack of new enterprise due to an unsatisfactory
market for capital investment. Since trade is international,
an insufficient output of new capital-goods in the world as
a whole affects the prices of commodities everywhere and
hence the profits of producers in all countries alike.

Why is there an insufficient output of new capital-goods in
the world as a whole? It is due, in my opinion, to a
conjunction of several causes. In the first instance, it was
due to the attitude of lenders—for new capital-goods are
produced to a large extent with borrowed money. Now it is
due to the attitude of borrowers, just as much as to that of
lenders.

For several reasons lenders were, and are, asking
higher terms for loans, than new enterprise can afford.
First, the fact, that enterprise could afford high rates for
some time after the war whilst war wastage was being made
good, accustomed lenders to expect much higher rates than
before the war. Second, the existence of political borrowers
to meet Treaty obligations, of banking borrowers to support
newly restored gold standards, of speculative borrowers to
take part in Stock Exchange booms, and, latterly, of
distress borrowers to meet the losses which they have
incurred through the fall of prices, all of whom were ready
if necessary to pay almost any terms, have hitherto enabled
lenders to secure from these various classes of borrowers
higher rates than it is possible for genuine new enterprise
to support. Third, the unsettled state of the world and
national investment habits have restricted the countries in
which many lenders are prepared to invest on any reasonable
terms at all. A large proportion of the globe is, for one
reason or another, distrusted by lenders, so that they exact
a premium for risk so great as to strangle new enterprise
altogether. For the last two years, two out of the three
principal creditor nations of the world, namely, France and
the United States, have largely withdrawn their resources
from the international market for long-term loans.

Meanwhile, the reluctant attitude of lenders has become
matched by a hardly less reluctant attitude on the part of
borrowers. For the fall of prices has been disastrous to
those who have borrowed, and anyone who has postponed new
enterprise has gained by his delay. Moreover, the risks that
frighten lenders frighten borrowers too. Finally, in the
United States, the vast scale on which new capital
enterprise has been undertaken in the last five years has
somewhat exhausted for the time being—at any rate so long
as the atmosphere of business depression continues—the
profitable opportunities for yet further enterprise. By the
middle of 1929 new capital undertakings were already on an
inadequate scale in the world as a whole, outside the United
States. The culminating blow has been the collapse of new
investment inside the United States, which to-day is
probably 20 to 30 per cent. less than it was in 1928. Thus
in certain countries the opportunity for new profitable
investment is more limited than it was; whilst in others it
is more risky.

A wide gulf, therefore, is set between the ideas of lenders
and the ideas of borrowers for the purpose of genuine new capital
investment; with the result that the savings of the lenders are being
used up in financing business losses and distress borrowers,
instead of financing new capital works.

At this moment the slump is probably a little overdone for
psychological reasons. A modest upward reaction, therefore,
may be due at any time. But there cannot be a real recovery,
in my judgment, until the ideas of lenders and the ideas of
productive borrowers are brought together again; partly by
lenders becoming ready to lend on easier terms and over a
wider geographical field, partly by borrowers recovering their
good spirits and so becoming readier to borrow.

Seldom in modern history has the gap between the two been so
wide and so difficult to bridge. Unless we bend our wills and
our intelligences, energized by a conviction that this diagnosis
is right, to find a solution along these lines, then, if the
diagnosis is right, the slump may pass over into a depression,
accompanied by a sagging price-level, which might last for
years, with untold damage to the material wealth and to the
social stability of every country alike. Only if we seriously
seek a solution, will the optimism of my opening sentences
be confirmed—at least for the nearer future.

It is beyond the scope of this article to indicate lines of
future policy. But no one can take the first step except the
central banking authorities of the chief creditor countries;
nor can any one Central Bank do enough acting in isolation.
Resolute action by the Federal Reserve Banks of the United
States, the Bank of France, and the Bank of England might do
much more than most people, mistaking symptoms or
aggravating circumstances for the disease itself, will
readily believe. In every way the more effective remedy
would be that the Central Banks of these three great
creditor nations should join together in a bold scheme to
restore confidence to the international long-term loan
market; which would serve to revive enterprise and activity
everywhere, and to restore prices and profits, so that in
due course the wheels of the world's commerce would go round
again. And even if France, hugging the supposed security of
gold, prefers to stand aside from the adventure of creating
new wealth, I am convinced that Great Britain and the United
States, like-minded and acting together, could start the
machine again within a reasonable time; if, that is to say,
they were energized by a confident conviction as to what was
wrong. For it is chiefly the lack of this conviction which
to-day is paralyzing the hands of authority on both sides of
the Channel and of the Atlantic.